Rising Rates May Increase Defect Risk, According to First American’s Loan Application Defect Index

We have seen this before, in 2013, as mortgage rates rise, so does overall defect, fraud and misrepresentation risk, says Chief Economist Mark Fleming


February 1, 2018, Santa Ana, Calif.

First American Financial Corporation (NYSE: FAF), a leading global provider of title insurance, settlement services and risk solutions for real estate transactions, today released the First American Loan Application Defect Index for December 2017, which estimates the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications. The Defect Index reflects estimated mortgage loan defect rates over time, by geography and loan type. It is available as an interactive tool that can be tailored to showcase trends by category, including amortization type, lien position, loan purpose, property and transaction types, and can provide state- and market-specific comparisons of mortgage loan defect levels.

December 2017 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications remained the same compared with the previous month.
  • Compared to December 2016, the Defect Index increased by 20.3 percent.
  • The Defect Index is down 18.6 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions remained unchanged compared to the previous month, and is 21.1 percent higher than a year ago.
  • The Defect Index for purchase transactions remained unchanged compared to the previous month, and is up 12.3 percent compared with a year ago.

Chief Economist Analysis: How Do Rising Mortgage Rates Influence Defect, Fraud and Misrepresentation Risk?

“Last month, I noted that defect, fraud and misrepresentation risk had finally stabilized after a significant, seven-month-long rise,” said Mark Fleming, chief economist at First American. “Much of the elevated risk can be attributed to an increase in the share of purchase mortgage transactions, which tend to carry more risk. It’s possible that all economists agree, a rarity, that mortgage rates will increase in 2018, which should increase the market share of purchase mortgage transactions, putting upward pressure on the overall risk of defect, fraud and misrepresentation.

“As the benefit of refinancing a mortgage declines for many consumers, the share of refinance loan transactions will likely decrease and the share of purchase transactions will increase. We have seen this before, in 2013, as mortgage rates rise, so does overall defect, fraud and misrepresentation risk,” said Fleming.

Additional Quotes from Chief Economist Mark Fleming:

  • “The Defect Index illustrates the distinct difference in risk between refinance and purchase loan transactions, a distinction that has been consistent over time. Refinance loan transactions have always been less risky than purchase transactions, and this difference is more pronounced today than six years ago.”
  • “Currently, refinance loan transactions are 24 percent less risky than purchase transactions.
  • The Mortgage Bankers Association forecasts that the 30-year, fixed-rate mortgage rate will rise to 4.8 percent by the end of 2018.”
  • “Rising mortgage rates will reduce the consumer benefit of refinancing their existing loans, so the share of all mortgage transactions that are refinance transactions is expected to decline to 27 percent in 2018.”
  • “We can look to the recent past for a glimpse at how defect risk will change as mortgage rates increase. Between January and September 2013 mortgage rates increased by 1.1 percent. Over that same time period, the overall level of risk in the Defect Index increased by 7.5 percent.”

December 2017 State Highlights

  • The five states with the greatest year-over-year increase in defect frequency are: South Dakota (+46.7 percent), New Mexico (+38.1 percent), Idaho (+31.6 percent), North Dakota (+31.1 percent) and Nebraska (+29.3 percent).
  • There is one state with a year-over-year decrease in defect frequency: Connecticut (-1.5 percent).

    December 2017 Local Market Highlights

  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the greatest year-over-year increase in defect frequency are: Virginia Beach, Va. (+39.7 percent), Orlando, Fla. (+32.9 percent), Oklahoma City (+31.9 percent), Miami (+31.3 percent), and Las Vegas (+30.2 percent).
  • There is one CBSA among the largest 50 CBSAs with a year-over-year decrease in defect frequency: Hartford, Conn. (-1.6 percent). 

    Next Release

    The next release of the First American Loan Application Defect Index will take place the week of February 26, 2018.

    Methodology

    The methodology statement for the First American Loan Application Defect Index is available at http://www.firstam.com/economics/defect-index.

    Disclaimer

    Opinions, estimates, forecasts and other views contained in this page are those of First American’s chief economist, do not necessarily represent the views of First American or its management, should not be construed as indicating First American’s business prospects or expected results, and are subject to change without notice. Although the First American Economics team attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. © 2018 by First American. Information from this page may be used with proper attribution. 

About First American

First American Financial Corporation (NYSE: FAF) is a leading provider of title insurance, settlement services and risk solutions for real estate transactions that traces its heritage back to 1889. First American also provides title plant management services; title and other real property records and images; valuation products and services; home warranty products; property and casualty insurance; and banking, trust and investment advisory services. With total revenue of $5.6 billion in 2016, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2016 and again in 2017, First American was named to the Fortune 100 Best Companies to Work For® list. More information about the company can be found at www.firstam.com.

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